Nontariff Trade Barriers

PowerPoint slides prepared b

Andreea Chiritescu
Eastern Illinois University
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classroom use

Import Quota
Import quota
Physical restriction on the quantity of
goods that can be imported during a
specific time period
Require an import license
Specifies the total volume of imports
allowed

On manufactured goods
Outlawed by the World Trade
Organization
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Import Quota
Global quota
Permits a specified number of goods to
be imported each year
Does not specify from where the product is
shipped or who is permitted to import

Plagued by accusations of favoritism

Selective quota
Import quota allocated to specific
countries
May lead to a domestic monopoly of
production and higher prices

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Import Quota
Effects of import quota on economys
welfare
Price increase
Decrease in consumer surplus
Redistributive effect
Deadweight loss
Protective effect
Consumption effect

Revenue effect
Windfall profit
Quota
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FIGURE
5.1

Import quota: trade and welfare

effects

By restricting available supplies of an imported product, a quota leads to higher

import prices. This price umbrella allows domestic producers of the importcompeting good to raise prices. The result is a decrease in the consumer
surplus. Of this amount, the welfare loss to the importing nation consists of the
protective
consumption
effect,
and
thatorportion
the revenue
effect
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Quotas Versus Tariffs

During periods of growing demand
An import quota restricts the volume
of imports by a greater amount than
does an equivalent import tariff
Quota
Limits the volume of imports
More restrictive than a tariff
Suppresses competition

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FIGURE
5.2

Trade effects of tariffs versus quotas

In a growing market, an import tariff is a less restrictive trade barrier than an

equivalent import quota. With an import tariff, the adjustment that occurs in
response to an increase in domestic demand is an increase in the amount of the
product that is imported. With an import quota, an increase in demand induces an
increase
in product
The price
leads ortoduplicated,
a rise in
production
and a fall

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consumption of the import-competing good, while the level of imports remains 7
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Tariff-Rate Quota: A Two-Tier

Tariff

Tariff-rate quota

Two-tier tariff
A quota that defines the maximum
volume of imports
And charges the within-quota tariff

Any imports above this level face a

higher tariff rate
Over-quota tariff

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Export Quotas
Export quotas
Market sharing pact, voluntary export
restraint agreement
To moderate the intensity of
international competition
Tend to be more costly than tariffs

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Domestic Content
Requirements

Domestic content requirements

By organized labor
To limit the practice of outsourcing

Minimum percentage of products

total value
That must be produced domestically
If the product is to qualify for zero tariff
rates

Pressure domestic and foreign firms

To use domestic inputs (workers)
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Domestic Content
Requirements

Domestic content requirements

Higher input prices
Higher product prices
Loss of competitiveness

Subsidizing by domestic consumers of

the domestic producer

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TABLE 5.3 Domestic content requirements applied to

automobiles in selected countries

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FIGURE
5.3

Welfare effects of a domestic content

requirement

A domestic content requirement leads to rising production costs and prices to the
extent that manufacturers are forced to locate production facilities in a highcost nation. Although the content requirement helps preserve domestic jobs, it
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imposes
welfare
losses
on domestic
consumers.
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Subsidies
Subsidies
Outright cash disbursements, tax
concessions, insurance arrangements,
and loans at below-market interest rates
From the government for producers
To help improve their market position
Provide domestic firms a cost advantage
Market products at prices lower than
warranted by their actual cost or profit
considerations
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Subsidies
Domestic production subsidy
Granted to producers of importcompeting goods

Export subsidy
Granted to producers of goods that
are to be sold overseas

Subsidy
Net price received by the producer =
price paid by the purchaser + subsidy
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Subsidies
Welfare effects of domestic production
subsidy
Higher output
Subsidy revenue some redistributed to
the more efficient producers - producer
surplus
Deadweight loss
Protective effect

Lower welfare loss than a tariff or a quota

Direct cost of the subsidy
Financed out of tax revenues paid by the public

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Subsidies
Welfare effects of export subsidy
Higher output and price
Higher exports; Lower domestic
consumption

Domestic producers gain at the expense

of the domestic consumer and taxpayer
Decrease in the consumer surplus
Increase in the producer surplus
Taxpayer - bears the cost of export subsidy

Deadweight loss of welfare

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FIGURE
5.4

Trade and welfare effects of subsidies

A government subsidy granted to import-competing producers leads to

increased domestic production and reduced imports. The subsidy revenue
accruing to the producer is absorbed by producer surplus and high-cost
production (protective effect). A subsidy granted to exporters allows them to sell
their products abroad at prices below their costs. However, it entails a
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Dumping
Dumping
Foreign producers charge lower prices
than domestic producers for an
identical product
After allowing for transportation costs
and tariff duties

Selling in foreign markets at a price

below the cost of production

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Dumping
Sporadic dumping (distress dumping)
A firm disposes of excess inventories
on foreign markets
Selling abroad at lower prices than at
home

May be the result of misfortune or

poor planning
Beneficial to importing consumers
Disruptive to import-competing
producers
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Dumping
Predatory dumping
A producer temporarily reduces the
prices charged abroad to drive foreign
competitors out of business
Acquiring a monopoly position
New higher prices to offset any losses that
occurred during the period of cutthroat
pricing
Prevent the entry of potential competitors

Home governments - concerned

Retaliate with antidumping duties

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Dumping
Persistent dumping
Goes on indefinitely
A producer may consistently sell
abroad at lower prices than at home

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Price Discrimination
International price discrimination
Different demand elasticity
Domestic market
Foreign market

Charge different prices - Higher profits

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Price Discrimination
Successful international price
discrimination
Submarkets demand conditions must differ
Ensure different demand elasticities

Firm must be able to separate the two

submarkets
Prevent any significant resale of commodities

Markets easier to separate internationally

High transportation costs
Governmental trade restrictions
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FIGURE
5.5

International price discrimination

A price-discriminating firm maximizes profits by equating marginal

revenue, in each submarket, with marginal cost. The firm will charge a
higher price in the less-elastic-demand (less competitive) market and a
lower price in the more-elastic-demand (more competitive) market.
Successful dumping leads to additional revenue and profits for the firm
compared to what would be realized in the absence of dumping.
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Antidumping Regulations
Antidumping duty
U.S. Department of Commerce
Foreign merchandise is being sold at less
than fair value (LTFV)

U.S. International Trade Commission

(ITC)
Determines that LTFV imports are
causing/threatening material injury

Imposed in addition to the normal

tariff
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Antidumping Law
Antidumping laws
Ensure a level playing field by
offsetting artificial sources of
competitive advantage
Protected industries gain
Consumers of the protected good lose
more
Whole economy lose more
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Other Nontariff Trade Barriers

Government procurement policies
Buy-national policies
1933, Buy American Act
Federal agencies
Purchase materials and products from U.S.
suppliers
If their prices are not unreasonably higher
than those of foreign competitors

Domestic product
At least 50% domestic component content
Manufactured in the United States
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Other Nontariff Trade Barriers

Government procurement policies
1933, Buy American Act
U.S. suppliers of civilian agencies
preferences over foreign firms
6-12% preference margin
50% preference margin for Department of
Defense. These preferences are
Waived if the U.S.-produced good is not
available in sufficient quantities or is not of
satisfactory quality

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Other Nontariff Trade Barriers

Government procurement policies
Barrier to free trade
Higher cost for government projects
Deadweight welfare losses
Protective and consumption effects

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Other Nontariff Trade Barriers

Social regulations
Correct a variety of undesirable side
effects markets ignore
Health, safety, and the environment

CAF Standards
Corporate average fuel economy
standards
Passenger cars: 27.5 miles per gallon

European Union
Ban on hormone-treated meat
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Other Nontariff Trade Barriers

Sea transport and freight regulations
U.S. shipping companies serving
Japanese ports
Highly restrictive system of port services
Clear every detail of its visit with Japans
stevedore-company association
Dockworkers available 18 hours a day
or less
Expensive
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Other Nontariff Trade Barriers

Sea transport and freight regulations
Ships docking in U.S. port
U.S. dockworkers
Unload and load 24 hours a day
30% less time
Half the price

Notify port authorities

Notify the Coast Guard

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